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2017 (5) TMI 524 - AT - Income TaxDisallowance of interest under section 36(1)(iii) - addition on proportionate basis, i.e., on account of diversion of borrowed funds (cash credit advances from two banks) for non-business purposes - Held that - As in the case of borrowing against hypothecation of stocks, if the assessee has maintained adequate stocks, i.e., inclusive of margin, during the year, no diversion of the relevant borrowed capital, to any extent, can be imputed. The relevant facts being not on record, we restore the matter back to the file of the Assessing Officer (AO) to allow the assessee an opportunity to state it s case. The AO shall decide on merits, issuing definite findings of fact. Needless to add, in the event of the assesseee not leading the facts, the AO shall draw all reasonable inferences on the basis of the material on record, and decide accordingly. We decide accordingly. Disallowance under section 14A - working the disallowance of interest expenditure - Held that - As in the present case, it is on a long term basis, so that it would result in long-term capital gain (on the sale of shares) and dividend income (during the currency of the investment), both taxexempt, it matters little whether the investment is in shares of a group or an outside company. No business purpose of the impugned investment, as also noted in the context of disallowance u/s. 36(1)(iii), has been advanced by the assessee at any stage, claiming, rather, the investment to be strategic (refer para 3 of this order). Why, where for a business purpose, the expenditure disallowed, which is on interest as well as indirect, administrative expenditure, would stand to be allowed u/s.36(1)(iii) or, as the case may be, sec.37(1) itself, so that the question of disallowance under section 14A does not arise. We find no merit in the assessee s case and, accordingly, confirm the impugned disallowance. In working the disallowance of interest expenditure, however, only the expenditure net of that disallowed u/s. 36(1)(iii) would be taken into account, else it would amount to a double disallowance, also taking care to exclude so as to maintain proper basis, the corresponding assets. That is, the entire interest considered for allowance or, as the case may be, disallowance u/s. 36(1)(iii), would stand excluded in reckoning the indirect interest disallowable u/s. 14A inasmuch as the application of borrowed capital, to that extent, stands resolved, and it is only the balance borrowed capital, entering the general pool of funds, which shall survive for being considered. Needless to add, corresponding adjustment for assets, both in the numerator and denominator, shall also be made Maintainability of deduction u/s. 80-IA of the Act on Clean Development Mechanism (CDM) receipt by the assessee in respect of it s two power generating units - Held that - In the facts of the present case, the assessee itself regards it as business income, claiming deduction u/s. 80-IA thereon, and which is the bone of contention between the parties. Continuing further, true, the CERs, though intangible, are to be valued as inventories, but it is only on account of the protocol that they stand to be recognized separately and are valuable/realizable. Similar view, in fact, stands also expressed by the tribunal in Appollo Tyres Ltd. v. Asst. CIT 2015 (3) TMI 760 - ITAT COCHIN holding the income arising on sale of CERs as business income u/s. 2(24)(vd) and, further, as not eligible for deduction u/s. 80-IA. Thus confirming the assessment of the impugned receipt as business income and disallowance of deduction u/s. 80-IA in its respect.
Issues Involved:
1. Disallowance of interest under section 36(1)(iii). 2. Disallowance under section 14A. 3. Maintainability of deduction under section 80-IA on 'Clean Development Mechanism' (CDM) receipts. Detailed Analysis: 1. Disallowance of Interest under Section 36(1)(iii): The first issue pertains to the disallowance of interest amounting to ?5,73,224/- under section 36(1)(iii) of the Income Tax Act, 1961, due to the alleged diversion of borrowed funds for non-business purposes. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance based on the decision in Suryavanshi Holdings Ltd. vs. Dy. CIT. The assessee relied on the Supreme Court decision in CIT v. S.A. Builders Ltd. 288 ITR 1 (SC). The Tribunal observed that the law is well-settled: if borrowed capital is used for non-business purposes, proportionate disallowance of interest is justified. The burden of proof lies with the assessee to establish that borrowed funds were employed wholly for business purposes. The Tribunal noted the absence of evidence to support the assessee's claim and the lack of clarity on the business of the assessee and its subsidiary/associate companies. However, the disallowance was made at a rate of 12% per annum without confirming if this was the actual interest rate suffered. The Tribunal restored the matter to the Assessing Officer (AO) to allow the assessee to present its case, directing the AO to issue definite findings of fact. 2. Disallowance under Section 14A: The second issue involves the disallowance of ?17,25,894/- under section 14A, applying Rule 8D, due to the assessee's investment in equity capital of subsidiary companies. The CIT(A) confirmed the disallowance, quoting the provision. The Tribunal clarified that the AO can make a disallowance under section 14A only if not satisfied with the correctness of the assessee's claim regarding expenditure in relation to income not forming part of the total income. The Tribunal emphasized that the assessee's claim must be with reference to its accounts. The AO's dissatisfaction in this case was based on sound grounds, noting the assessee's expenditure on interest and investment in shares. The Tribunal found no merit in the assessee's case and confirmed the disallowance, with a directive to exclude the interest disallowed under section 36(1)(iii) to avoid double disallowance. 3. Maintainability of Deduction under Section 80-IA on 'Clean Development Mechanism' (CDM) Receipts: The third issue concerns the maintainability of deduction under section 80-IA on CDM receipts. The AO, following the decisions in Liberty India v. CIT and Pandian Chemicals Ltd. v. CIT, concluded that the relationship between power generation and carbon credit is not direct, thus disallowing the deduction. The CIT(A) treated the CDM receipt as a capital receipt, relying on the decision in Ambika Cotton Mills Ltd. v. Dy. CIT. The Tribunal observed the dichotomy in the CIT(A)'s order, noting that a capital receipt would be excluded from total income, rendering the section 80-IA claim superfluous. The Tribunal clarified that a capital receipt is in lieu of a capital asset or source of income, not the income itself. The Tribunal concluded that the CDM receipt arises from the business of power generation using preferred technology and is a revenue receipt, not a capital receipt. The Tribunal confirmed the assessment of the CDM receipt as business income and the disallowance of the deduction under section 80-IA. Conclusion: The assessee's appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to re-examine the disallowance of interest under section 36(1)(iii) and confirming the disallowance under section 14A and the assessment of CDM receipts as business income.
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